Mideast Turmoil impacts Oil-exporting Nations

The ongoing turmoil in Syria as well as the tensions between the West and Iran would continue their impact on Gulf Arab oil-exporting nations with a double-edged sword, an expert on the region’s economy said.

“Over the past 18 months, global economic uncertainties and massive regional sociopolitical instability have been a serious drag on investor sentiment in the Middle East region as a whole,” Farouk Soussa, Citigroup’s Middle East Chief Economist in Dubai, said in the latest Middle East Macroeconomic Monthly.

“In the coming 12 to 18 months, we think negative news flow on politics is likely to continue to act as a drag on regional risk asset performance,” he said.

“The conflict in Syria is likely to be long and drawn out, and could get worse before it gets better,” Soussa said, according to Xinhua,  adding that “There is no immediate resolution to the Iranian nuclear crisis in sight.”

Soussa identified a two-edge sword for the Gulf Arab economies. “The negative news flow has meant that Gulf risk assets have underperformed non-regional peers. We believe this is likely to continue to be the case so long as politics dominate the headlines, “Soussa said, referring to five-year credit default swaps (CDS).”

With CDS, investors can insure sovereign bonds against default. The higher the value of a CDS, the fewer the market regards the underlying state’s capability to refinance itself.

Soussa said that “Middle Eastern sovereigns have seen their CDS spreads widen significantly more than non-regional emerging markets and there seems to be little distinction made between oil- rich Gulf sovereigns and the rest of the region.”

On the other hand, oil prices surged 16 percent last year amid the turmoil to around 105 U.S. dollars per barrel. According to Soussa, the resulting high oil prices led to windfall revenues in the six member states of the Gulf Cooperation Council (GCC), Saudi Arabia, Kuwait, Bahrain, Qatar, the United Arab Emirates (UAE) and Oman.

“This is generating record domestic spending, investment and economic growth,” Soussa said. “By 2015, the difference between oil revenues based on IMF assumptions from 2010 and Citi’s current assumptions on oil prices would put the cumulative windfall at over one trillion U.S. dollars.”

Soussa said Saudi Arabia will play a key role to prevent oil prices form rising too high and eventually hurting the economy.

“The higher crude prices resulting from the Iranian oil embargo and related risk premia are finally hitting final consumers with a vengeance. All eyes will be on the ability of Saudi Arabia to perform its historical swing supplier role,” he said.

Oil prices took a dip in the last two weeks, falling to around 103 dollars per barrel from 107 dollars amid rising Saudi oil production “to the highest level in 30 years,” Soussa said.

“February figures show Saudi production steady at 9.7 million barrels per day, and we believe that these levels are likely to be maintained for the remainder of the year, meaning an increase in average production of around 5 percent over last year’s average,” the expert said.